This calculator estimates the risk-adjusted value of a loan by comparing its contractual cash flows with the return required to compensate for expected credit losses and the capital required to absorb unexpected losses.
Rho (asset correlation) = 19% (Basel formula, from PD) · used for the capital charge
Risk-adjusted value
94.3%
EUR9,430,000 · priced at required return (EL + capital)
EL-only value
96.4%
ignores capital charge
RAROC
14.2%
vs 12% hurdle
Actual spread
300 bps
coupon - risk-free
Required spread
265 bps
EL 155 + cap 110
The calculator uses a one-factor Vasicek credit-risk model to estimate the unexpected loss associated with the loan. The model links the probability of default to a systematic credit factor and derives a stressed, high-percentile default rate.
The EL-only value discounts the loan's expected cash flows at the risk-free rate. It therefore reflects expected credit losses but does not charge for the capital required to absorb unexpected losses.
The capital charge is based on the difference between the Vasicek 99.9% conditional default rate and the expected default rate. This unexpected loss is multiplied by the LGD and the chosen hurdle rate to produce a capital charge spread.
The risk-adjusted value then discounts the loan's actual contractual cash flows at the risk-free rate plus the required spread. A loan priced at exactly the required spread has a value of par when its return meets the specified hurdle rate.
RAROC measures the return generated by the loan after expected credit losses relative to the economic capital required to support the exposure.